2
Fore Objectives 1.Explain the _______ of E&P, 2.Determine whether E&P must follow _____ or ________ basis rules. 3.Identify differences between E&P and ________ _______, and 4.Calculate ________ E&P. You should be able to:

3
Earnings & Profits Code describes how certain transactions _____ E&P but does not _____ the concept Purpose: –Measures ________-paying ability –Represents how much can be distributed without dipping into _________ Not same as: –Taxable income or –_______ earnings

5
Mazzocchi Bus Co. v. CIR (CA-3, 1994) The owner of a closely-held, _____ basis corporation diverted corporate receipts for his personal use and failed to report the gross income on either the corporate or his individual return. After the owner’s conviction for tax evasion, the corporation paid taxes, penalties, and interest. To treat some of the constructive distribution as a return of capital, the individual argued the corporation can reduce E&P by the ________ but _______ taxes, penalties, and interest. The ______ was silent on this point.

13
Lind et al., p. 168 X Corporation is a cash method taxpayer with the following income and expenses for the year: Gross profit from sales$20,000 Salaries paid to employees10,250 Tax-exempt interest received3,000 Dividends received from IBM5,000 Depreciation*2,800 LTCG from selling stock2,500 LTCL from selling stock5,000 LTCL carryforward from prior year1,000 Estimated federal income tax paid800 *Paid $14,000 this year for 5-year property but did not elect §179 immediate deduction. For E&P purposes, the property has a 7-year class life. Compute taxable income and CE&P. Taxable Income CE&P